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Background

Since 2007, Switzerland’s privileged taxation of holding companies and mixed and domiciliary companies has been under increasing international pressure, in particular from the European Union and the OECD. The federal and cantonal governments have reacted, and are currently reshaping the Swiss tax legislation. The Federal Council submitted the dispatch on the "Federal Act on Tax-Related Measures to Strengthen the Competitiveness of Switzerland as a Business Location" to Parliament in June 2015. On 17 June 2016, Parliament adopted the Corporate Tax Reform III regime. Because a referendum was launched and the required number of signatures were submitted, the Swiss people will vote on the Corporate Tax Reform III on 12 February 2017.

Overview of tax reform measures

The aim of Corporate Tax Reform III is to maintain and further develop Switzerland’s position as one of the most attractive business locations worldwide, while increasing international acceptance of its corporate tax legislation and sustainably securing adequate tax revenues to finance public activities. The focus is on providing legal certainty and security of investment while also increasing the general competitiveness of the tax system and abolishing special tax regimes.

The tax reform measures include:

Introduction of a Patent box regime at the cantonal level—The proposed Patent box regime would help retain and encourage investments in Switzerland, achieved by providing an incentive to retain and commercialize existing patents (and similar rights such as, probably, non-patented inventions by small and medium-sized enterprises and software), to develop new, innovative patented products, and also by encouraging companies to relocate development-related, high-value jobs to Switzerland.

Optional introduction of input incentives—The cantons would have the option of envisaging increased deductions for research and development expenditure.

Introduction of a notional interest deduction at federal level and optionally, at cantonal level—In the case of the so-called interest-adjusted corporate income tax, a “notional” interest deduction would be granted on excessive shareholders' equity, thus allowing for an equal tax treatment of shareholders' equity and debt. However, cantons would be allowed to introduce the interest-adjusted corporate income tax at cantonal level only, if the cantons in question impose a partial taxation of dividends of at least 60% for private individuals. The current regime of participation deduction for shareholders that are corporations or co-operatives would remain.

Introduction of an overall limitation at cantonal level—The tax burden easing from the measures of the reform may reduce profits at cantonal level by a maximum of 80%. However, cantons could also introduce lower easing limits. This would give cantons more planning security

Step-up mechanism to disclose hidden reserves—The proposed step-up mechanism aims to allow planning certainty for both taxpayers and the tax authorities. It would establish a consistent tax treatment of companies relocating to or from abroad, and also relating to the transition in the course of the Corporate Tax Reform III.

General lowering of cantonal corporate income tax rates—Cantons could reduce their cantonal and communal corporate income tax rates. Certain cantons have already announced or decided on new rates. For instance, the Canton of Vaud has decided in a popular referendum to reduce its rate to 13.8%.

Further measures—There would be further measures pertaining to relief on capital tax levied on participations, patents as well as similar rights, and intra-group loans. Repeal of the stamp duty on newly issued equity securities is expected to be treated in a separate draft legislation. A proposed tonnage tax regime was not ultimately included in the tax reform.

Read a 2017 report prepared by the KPMG member firm in Switzerland

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